The European securities industry is in the middle of a big rehab project. It’s as though the building inspectors came along and said: “This structure is basically sound, but the plumbing and wiring need to be replaced. It was all built to old-fashioned local specifi cations. Now you need to bring it up to the new pan-European code.”
In this case, the plumbing and wiring are the post-trade systems that Europe’s stock exchanges and the emerging set of multilateral trading facilities (MTFs) rely on to make sure their trades are cleared and settled. The building inspectors are from the European Commission. And the “code” is the Code of Conduct that the European securities industry agreed to adopt 18 months ago in order to make clearing and settlement – the plumbing and the wiring – a more innovative and competitive business without the need for legislative intervention.
So far, however, this rehab project isn’t going quite as planned. Instead of the broader business the Commission envisioned, where clearing organisations are able to compete for processing volume from the exchanges, the industry’s reaction has mostly been to cling to its old plumbing and wiring. The derivatives markets, which are outside the scope of the Code, have even gone in the opposite direction. Rather than allow other organisations to clear their trades, as the Code of Conduct stipulates, the exchanges are talking about creating entirely captive clearing units. In other words, they want to build new structures and then wire them the old-fashioned way so they can’t be hooked into the broader “power grid.”
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